Wednesday, December 16, 2009

Audit Avoidance as Tax Obstruction (12/16/09)

Today's Tax Notes had this article that grabbed my attention: Sam Young, Estate Tax Officer Provides Hints for Audit Avoidance, 2009 TNT 239-5. I have written ad nauseum on the potential for audit avoidance to be viewed as a tax crime. See my previous blogs here. The title was titillating so I read the article. Not really much there in terms of juicy tips, but the tips provided were clearly designed to lower the chance of audit. Key points were:

1. "Every estate tax return is reviewed by hand for audit potential." I presume that "by hand" means visually reviewed rather than just handled by hand.

2. Include relevant documents with the return.

3. Provide substantiation for claims with the return rather than awaiting an audit.

4. Be sure and report previous gifts, because the IRS associates gift tax returns with the estate tax return. I suppose he means that discrepancies can be caught, so it is important from an audit potential standpoint to address this up front.

5. One practitioner offered that "the appearance of the return is important. Sloppy returns attract attention, so 'neatness matters.'" (Some quotation marks omitted.)

All of these "tips" although appearing rather mundane are really intended to lessen the chance that the IRS will audit the estate tax return. In that sense, they may at least in theory come within the scope of potential criminal activity, particularly if there is some aggressive item reported in the return that the additional disclosures or even the neatness are intended to divert attention. I don't think the particular items here really could turn into a problem alone, but packaged with other bad facts could be part of the ambiance of a tax obstruction charge.

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